Professional Documents
Culture Documents
639
640
641
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Case 1
Not
Releva Releva
Item
nt
nt
Sales revenue.............
X
Direct materials..........
X
Direct labor.................
X
Variable
manufacturing
overhead..................
X
Book valueModel
A3000 machine........
X
Disposal value
Model A3000
machine...................
X
DepreciationModel
A3000 machine........
X
Market valueModel
B3800 machine
(cost)........................
X
Fixed manufacturing
overhead..................
X
Variable selling
expense...................
X
Fixed selling expense..
X
General
administrative
overhead..................
X
Case 2
Not
Relevan Relevan
t
t
X
X
X
X
X
X
X
X
X
X
X
X
$(80,000)
$15,00
Liability insurance.......................................
0
Program administrators salary................... 37,000
52,000
Decrease in net operating income for the
organization as a whole..............................
$(28,000)
Depreciation on the van is a sunk cost and the van has no
salvage value since it would be donated to another
organization. The general administrative overhead is allocated
and none of it would be avoided if the program were dropped;
thus it is not relevant to the decision.
The same result can be obtained with the alternative analysis
below:
Difference:
Total If
Net
HouseOperating
keeping
Income
Is
Increase or
Dropped (Decrease)
Current
Total
$900,00
Revenues................................
0 $660,000
Variable expenses................... 490,000 330,000
Contribution margin................ 410,000 330,000
Fixed expenses:
Depreciation*....................... 68,000
68,000
Liability insurance................. 42,000
27,000
Program administrators
salaries.............................. 115,000
78,000
General administrative
overhead............................ 180,000 180,000
$(240,000)
160,000
(80,000)
0
15,000
37,000
0
643
Total
$900,00
Revenues........................
0
Variable expenses........... 490,000
Contribution margin........ 410,000
Traceable fixed expenses:
Depreciation................. 68,000
Liability insurance......... 42,000
Program administrators
salaries...................... 115,000
Total traceable fixed
expenses...................... 225,000
Program segment
margins........................ 185,000
General administrative
overhead...................... 180,000
Net operating income
(loss)............................ $5,000
Home
Nursing
$260,00
0
120,000
140,000
Meals
on
Wheels
$400,00
0
210,000
190,000
Housekeeping
$240,00
0
160,000
80,000
8,000
20,000
40,000
7,000
20,000
15,000
40,000
38,000
37,000
645
Per Unit
Differential
Costs
Mak
e
Buy
Cost of purchasing..................
Direct materials......................
Direct labor.............................
Variable manufacturing
overhead..............................
Fixed manufacturing
overhead, traceable1............
Fixed manufacturing
overhead, common...............
$20
$6
8
1
15,000
30,000
0
$20
Make
$
90,000
120,000
Difference in favor of
continuing to make the
parts.....................................
15,000 units
Buy
$300,00
0
0
0
$255,00 $300,00
0
0
$3
$45,000
Based on these data, the company should reject the offer and
should continue to produce the parts internally.
Make
2.
Buy
$300,00
0
0
Difference in favor of purchasing from
the outside supplier............................
$20,000
Thus, the company should accept the offer and purchase the
parts from the outside supplier.
647
$349.95
Total
10
bracelets
$3,499.50
143.00
86.00
7.00
1,430.00
860.00
70.00
6.00
$242.00
60.00
2,420.00
465.00
2,885.00
$ 614.50
Even though the price for the special order is below the
company's regular price for such an item, the special order would
add to the company's net operating income and should be
accepted. This conclusion would not necessarily follow if the
special order affected the regular selling price of bracelets or if it
required the use of a constrained resource.
Ski
Vault
$220
60
$160
Golf
Caddy
$300
120
$180
Fishing
Quiver
$175
55
$120
4
minutes
5
minutes
2
minutes
$40 per
minute
$36 per
minute
$60 per
minute
Ski
Vault
$220
60
$160
5
pounds
$32 per
pound
Golf
Caddy
$300
120
$180
Fishing
Quiver
$175
55
$120
6 pounds
$30 per
pound
5
pounds
$24 per
pound
649
(a) (b).............................
In this case, production of the Ski Vault would be the most
profitable use of the constrained resource. The contribution
margin per unit of the constrained resource for this product is
$32, which is larger than for the other two products.
651
Leather
Library
Chair
$1,800
1,200
$ 600
12 hours
$50 per
hour
Gainsborough
Armchai
r
$1,300
800
$ 500
Leathe
r
Library
Chair
$1,800
1,200
$ 600
Chippe
n-dale
Fabric
Armcha
ir
$1,400
1,000
$ 400
8 hours
12
hours
5 hours
$62.50
per hour
$50.00
per
hour
$80.00
per hour
Product
X
Product
Y
$80,000 $150,000
50,000
90,000
30,000
60,000
35,000
40,000
$(5,000)
20,000
Product
Z
$75,000
60,000
15,000
12,000
3,000
653
$9.00
$3.00
8
5
$32.00 $14.00
3
$21.00
$4.00
$2.80
$7.00
655
$
Salary of the product line manager...... 21,000
Advertising........................................... 110,000
Insurance on inventories......................
9,000
$(260,000
)
140,000
$(120,000
)
$ (70,000 $(190,000
Net operating loss....................
)
)
$(120,000)
657
$0.35
0.08
$0.43
* Depreciation........................ $2,000
Insurance.............................
960
Garage rent.........................
480
Automobile tax and license.
60
Total..................................... $3,500
2. The variable operating costs would be relevant in this situation.
The depreciation would not be relevant since it relates to a
sunk cost. However, any decrease in the resale value of the car
due to its use would be relevant. The automobile tax and
license costs would be incurred whether Samantha decides to
drive her own car or rent a car for the trip during spring break
and are therefore irrelevant. It is unlikely that her insurance
costs would increase as a result of the trip, so they are
irrelevant as well. The garage rent is relevant only if she could
avoid paying part of it if she drives her own car.
3. When figuring the incremental cost of the more expensive car,
the relevant costs would be the purchase price of the new car
(net of the resale value of the old car) and the increases in the
fixed costs of insurance and automobile tax and license. The
original purchase price of the old car is a sunk cost and is
therefore irrelevant. The variable operating costs would be the
same and therefore are irrelevant. (Students are inclined to
think that variable costs are always relevant and fixed costs are
always irrelevant in decisions. This requirement helps to dispel
that notion.)
Buy
$470,00
Total cost, as above..................................... $380,000
0
Rental value of the space (opportunity
cost)......................................................... 150,000
$470,00
Total cost, including opportunity cost.......... $530,000
0
Net advantage in favor of buying................
$60,000
659
A
$18
$12
8
1.5
B
$36
$32
8
4.0
C
$20
$16
8
2.0
$12
$9
$10
3,00 3,00 3,00
Direct labor-hours available................
0
0
0
$36,00 $27,00 $30,00
Total contribution margin....................
0
0
0
Although product A has the lowest contribution margin per unit
and the second lowest contribution margin ratio, it has the
highest contribution margin per direct labor-hour. Since labor
time seems to be the companys constraint, this measure
should guide management in its production decisions.
3. The amount Banner Company should be willing to pay in
overtime wages for additional direct labor time depends on
how the time would be used. If there are unfilled orders for all
of the products, Banner would presumably use the additional
time to make more of product A. Each hour of direct labor time
generates $12 of contribution margin over and above the usual
direct labor cost. Therefore, Banner should be willing to pay up
to $20 per hour (the $8 usual wage plus the contribution
margin per hour of $12) for additional labor time, but would of
course prefer to pay far less. The upper limit of $20 per direct
labor hour signals to managers how valuable additional labor
hours are to the company.
661
663
Relevant Costs
Make
Buy
$240,00
0
165,000
30,000
60,000
$600,00
0
$495,00 $600,00
0
0
665
$25
8
7
$40
667
$(2,100)
$600
700
125
50
175
1,650
$ (450)
Reason
The drivers are all on salary and
there would be no change in the
number of drivers on the payroll.
Depreciation due to wear and tear
is negligible and there would be no
change in the number of buses in
the fleet.
There would be no change in the
number of buses in the fleet.
There would be no change in the
size of the maintenance &
preparation staff.
Keep
the
Tour
Ticket revenue............................
Less variable expenses...............
Contribution margin....................
Less tour expenses:
Tour promotion.........................
Salary of bus driver..................
Fee, tour guide.........................
Fuel for bus...............................
Depreciation of bus..................
Liability insurance, bus.............
Overnight parking fee, bus.......
Room & meals, bus driver and
tour guide..............................
Bus maintenance and
preparation............................
Total tour expenses.....................
Net operating loss.......................
Difference
: Net
Operating
Income
Increase
or
(Decrease)
Drop
the
Tour
$3,000 $
900
2,100
0
0
0
$(3,000)
900
(2,100)
600
350
700
125
450
200
50
0
350
0
0
450
200
0
600
0
700
125
0
0
50
175
175
300
300
2,950
1,300
$(850) $(1,300)
0
1,650
$ (450)
669
671
Plant Kept
Open
Plant
Closed
Difference
Net
Operating
Income
Increase
(Decrease)
Verification:
Operate at
12,000
Gallons for
Two
Months
$ 420,000
Close for
Two
Months
$
0
252,000
168,000
0
0
460,000
340,000
620,000
558,000
1,080,000
898,000
0
14,000
1,080,000
912,000
$ (912,000) $(912,000)
673
40,000
210,000
250,000
160,000
90,000
$0.80
0.50
$0.30
The total variable cost of producing one box of Zippo pens is:
Direct materials................................................
Direct labor.......................................................
Variable manufacturing overhead.....................
Total variable cost per box................................
$1.50
1.00
0.30
$2.80
If the cartridges for the Zippo pens are purchased from the
outside supplier, then the variable cost per box of Zippo pens
would be:
Direct materials ($1.50 80%)........................
Direct labor ($1.00 90%)...............................
Variable manufacturing overhead ($0.30
90%)...............................................................
Purchase of cartridges......................................
Total variable cost per box................................
$1.20
0.90
0.27
0.48
$2.85
$0.30
0.10
0.03
675
$0.43
$0.48
$0.05
$64,500
30,000
$94,500
$72,000
$43,000
24,000
$67,000
677
$45,000
7,000
15,000
8,000
75,000
12%
$9,000
679
$40
24
$16
681
Keep the
Plant
Close the
Open
Plant
$ 200,000 $
0
120,000
80,000
100,000
0
0
60,000
90,000
60,000
190,000 120,000
$(120,000
Net operating income (loss)............ $(110,000)
)
4. The relevant cost is $1.70 per unit, which is the variable selling
expense per Zet. Since the blemished units have already been
produced, all production costs (including the variable
production costs) are sunk. The fixed selling expenses are not
relevant since they will remain the same regardless of whether
or not the blemished units are sold. The variable selling
expense may or may not be relevantdepending on how the
blemished units are sold. For example, the units may be sold
through a liquidator without incurring the normal variable
selling expense.
5. The costs that can be avoided by purchasing from the outside
supplier are relevant. These costs are:
Variable production costs......................................
Fixed manufacturing overhead cost ($400,000
70% = $280,000; $280,000 80,000 units).......
Variable selling expense ($1.70 60%)................
$22.30
3.50
1.02
683
$26.82
$8.00
Direct materials..............
Direct labor ($4.00
0.75).............................
Variable overhead
($0.60 0.75).............
Supervision.....................
Equipment rental*...........
$2.75
Total................................
$8.45 $8.00
Difference in favor of
buying
Total Differential
Costs for
40,000 Units
Make
Buy
$320,00
0
$110,00
0
3.00
120,000
0.45
0.75
1.50
18,000
30,000
60,000
$338,00 $320,00
0
0
$0.45
$18,000
685
$2.75
3.00
0.45
$8.00
Total Differential
Costs50,000
Units
Make
Buy
$400,00
0
$137,500
150,000
22,500
0.60
30,000
1.20
60,000
$8.00 $8.00
$0
$400,000
$400,00
0
$0
$0.3
0
$18,000
The company should rent the new equipment and make the
subassemblies if 60,000 units per year are needed.
687
Depreciation
General administrative
expenses
689
Fixed
R10,00
0
Contribution margin
Sales
R300,000-R240,000
= 20%
R300,000
691
Fixed costs
CM ratio
R12,000
= R60,000
0.20
Tina
Cari
Lenn
y
Sewin
g Kit
$ 2.40
0.20
$22.0 $18.0
Selling price................. $35.00 $24.00
0
0 $14.00
Variable costs:
Direct materials......... 3.50
2.30 4.50 3.10
1.50
Direct labor................ 4.80
3.00 8.40 6.00
2.40
Variable overhead...... 1.60
1.00 2.80 2.00
0.80
Total variable costs...... 9.90
6.30 15.70 11.10
4.70
Contribution margin
(b)............................. $25.10 $17.70 $ 6.30 $ 6.90 $ 9.30
Contribution margin
$13.8
per DLH (b) (a)....... $62.75 $70.80 $ 9.00
0 $46.50
* Direct labor cost per unit $12.00 per direct labor-hour
2.
Product
Marcy.......................
Tina..........................
Cari..........................
Lenny.......................
Sewing Kit................
Total DLHs required. .
Estimate
DLH
d Sales
Per Unit
(units)
0.40
26,000
0.25
42,000
0.70
40,000
0.50
46,000
0.20
450,000
Total
DLHs
10,400
10,500
28,000
23,000
90,000
161,900
3. Because the Cari doll has the lowest contribution margin per
labor hour, its production should be reduced by 17,000 dolls
(11,900 excess DLHs 0.70 DLH per doll = 17,000 dolls). Thus,
production and sales of the Cari doll will be reduced to 23,000
dolls for the year.
693
695
697
Selling price..............................
Variable costs:
Direct materials......................
Variable manufacturing
overhead..............................
Variable selling and
administrative......................
Total variable cost.....................
Contribution margin..................
Manufactured
Purchase
Mountain
d XSX
XSX
Bike
Drums
Drums Frames
$154.00 $154.00 $65.00
120.00
0.00
44.50
1.05
17.50
0.60
0.85
0.85
0.40
120.85
$ 33.15
46.40
$107.60
18.50
$46.50
Manufactured
Mountai
XSX
n Bike
Drums
Frames
$107.60 $46.50
0.8 hour 0.2 hour
$134.50 $232.50
per hour per hour
699
(b)
Unit
Contribution
Quantity Margin
3,500
1,625
$ 46.50
107.60
1,375
33.15
(c)
Weldin
g Time
per
Unit
0.20
0.80
(a) (c)
Total
Weldin
g Time
700
1,300
Balanc
e of
Weldin
g Time
2,000
1,300
0
Total
Contribution
$162,75
0
174,850
45,58
1
383,181
269,00
0
$114,18
(a)
(b)
700
701
702
Quantity
Total hours available...............
(b)
Unit
Contribution
Margin
XSX Drumsmake..................
Mountain bike frames
produced..............................
2,500
$103.1
0
24.00
XSX Drumsbuy....................
Total contribution margin........
500
33.15
(c)
(a) (c)
Weldin
g Time
Total
per
Weldin
Unit
g Time
0.80
0.20
2,000
0
Balanc
e of
Weldin
g Time
2,000
0
0
Total
Contribution
$257,75
0
0
16,57
5
274,325
257,75
0
$ 16,57
5
(a)
(b)
703
Plan 1:
Mountain bike
frames..................
XSX drums...............
Plan 2:
XSX drums...............
Total
Direct
LaborHours
1,625
1.25*
0.25**
4,375
406
4,781
2,500
0.25**
625
704
$162,75
0
174,850
45,58
1
383,181
68,40
0
$314,78
1
$269,00
0
16,57
5
$285,57
5
$ 29,20
6
705
706
$ 8,000,000
$6,700,000
400,000
1,900,000
9,000,000
900,000
$17,900,00
0
$1,300,000
2,100,000
700,000
600,000
1,700,000
$6,400,000
707
First Year
Other Years
$(21,000,00$(21,000,000
0)
)
17,900,000
17,900,000
(2,800,000)
2,000,000
708
$ (3,900,000 $ (3,100,000
)
)
709
710
$ 500
4,050
4,500
8,000
1,37
5
18,42
5
5,600
7,35
0
12,95
0
3,375
$34,75
0
711
712
713
714
715
716
717
Contribution margin
of
cracked wheat
718